Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 17, Problem 10P

1.

To determine

Compute the total estimated gross profit on the contracts.

1.

Expert Solution
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Explanation of Solution

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Calculate the total estimated gross profit:

 As of December 31
 201920202021
Contract Price$20,000,000 $20,000,000 $20,000,000
Costs incurred to date$8,000,000 $16,000,000 $18,000,000
Estimated costs to complete$6,000,000 $3,000,000 $0
Total costs estimated to date (ContractpriceEstimatedcoststocomplete)$14,000,000 $19,000,000 $18,000,000
Estimated gross profit$6,000,000$1,000,000$2,000,000

Table (1)

2.

To determine

Compute the percentage of completion for 2019, 2020 and 2021.

2.

Expert Solution
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Explanation of Solution

Compute the percentage of completion for 2019:

Percentageofcompletionfor2019}=CostsincurredtodateCostincurredtodate+Estimatedcoststocomplete=$8,000,000$8,000,000+$6,000,000=$8,000,000$14,000,000×100=57.1%

Therefore, the percentage of completion for 2019 is 57.1%.

Compute the percentage of completion for 2020:

Percentageofcompletionfor2020}=CostsincurredtodateCostincurredtodate+Estimatedcoststocomplete=$16,000,000$16,000,000+$3,000,000=$16,000,000$19,000,000×100=84.2%

Therefore, the percentage of completion for 2020 is 84.2%.

Compute the percentage of completion for 2021:

Percentageofcompletionfor2021}=CostsincurredtodateCostincurredtodate+Estimatedcoststocomplete=$18,000,000$18,000,000+$0=$18,000,000$18,000,000×100=100%

Therefore, the percentage of completion for 2021 is 100%.

3.

To determine

Compute the percentage of completion for 2019, 2020 and 2021.

3.

Expert Solution
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Explanation of Solution

Compute the amount of income recognized for 2019:

Incomerecognizedduring2019}=Percentcompleted×Estimatedgrossprofit=57.1%×$6,000,000=$3,426,000

Therefore, the amount of income recognized during 2019 is $3,426,000.

Compute the amount of income recognized for 2020:

Incomerecognizedduring2020}=[(Percentcompleted×Estimatedgrossprofit)(Incomerecognizedduring2019)]=[(84.2%×$1,000,000)$3,426,000]=($2,584,000)

Therefore, the amount of income recognized during 2020 is ($2,584,000).

Compute the amount of income recognized for 2021:

Incomerecognizedduring2021}=[(Percentcompleted×Estimatedgrossprofit)(Incomerecognizedduring2019+ Incomerecognizedduring2020)]=[(100%×$2,000,000)($3,426,000+ $2,584,000)]= $1,158,000

Therefore, the amount of income recognized during 2021 is $1,158,000.

4.

To determine

Journalize entries related to the project for 3 years.

4.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entries:

DateAccount titles and explanationDebit ($)Credit ($)
2019Construction in progress (inventory)8,000,000 
      Accounts payable, cash, salaries, payables etc. 8,000,000
  (To record costs of construction)  
    
 Construction expense8,000,000 
 Construction in progress (Refer to requirement 3)3,426,000 
      Construction revenue ($8,000,000$3,426,000) 11,426,000
  (To record gross profit)  
    
 Accounts receivable8,000,000 
      Partial billings 8,000,000
  To record partial billings)  
    
 Cash6,000,000 
      Accounts receivable 6,000,000
(To record collections)
2020Construction in progress (inventory)8,000,000 
      Accounts payable, cash, salaries, payables etc. 8,000,000
  (To record costs of construction)  
    
 Construction expense8,000,000 
      Construction in progress (Refer to requirement 3)  2,584,000
      Construction revenue ($8,000,000$2,584,000) 5,416,000
  (To record gross profit)  
    
 Accounts receivable8,000,000 
      Partial billings 8,000,000
  To record partial billings)  
    
 Cash6,000,000 
      Accounts receivable 6,000,000
 (To record collections)  
    
2021Construction in progress (inventory)2,000,000 
      Accounts payable, cash, salaries, payables etc. 2,000,000
  (To record costs of construction)  
    
 Construction expense2,000,000 
 Construction in progress (Refer to requirement 3)1,158,000 
      Construction revenue ($2,000,000$1,158,000) 3,158,000
  (To record gross profit)  
    
 Accounts receivable4,000,000 
      Partial billings 4,000,000
  To record partial billings)  
    
 Cash6,000,000 
      Accounts receivable 6,000,000
 (To record collections)  
    
 Partial billings20,000,000 
      Construction in progress 20,000,000
 (To record and to close partial billings)  

Table (2)

5.

To determine

Explain the manner in which the project will be carried on the balance sheet for 2019, 2020 and 2021.

5.

Expert Solution
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Explanation of Solution

The manner in which the project is carried on the balance sheet for the year 2019, 2020 and 2021 is explained below:

 As of December 31,
Current assets201920202021
Accounts receivable$2,000,000 $4,000,000 $2,000,000
Construction in progress$11,426,000 $16,842,000  
Less: Partial billings$8,000,000 $16,000,000  
Construction in progress in excess of billings$3,426,000$842,000 

Table (3)

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Chapter 17 Solutions

Intermediate Accounting: Reporting And Analysis

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